In Class Exercise--- Chapter 4_Solution

1. For a manufacturer, beginning work in process would be equal to

A) Manufacturing costs incurred in the period - ending work in process inventory.B) Cost of goods manufactured - ending work in process inventory + manufacturing costs incurred in the period.C) Ending work in process inventory + manufacturing costs incurred in the period.D) Cost of goods manufactured + ending work in process inventory - manufacturing costs incurred in the period.

Solution:

D

This question essentially wants to test your understanding on cost of good manufactured, introduced in Chapter 2 of this book. Chapter 2 provides the basic managerial accounting concepts, such as cost object, indirect cost, direct cost, and manufacturing overhead. On the basis of this cost information (DM, DL, and MOH in particular), managers can get the cost of goods sold information to prepare the income statement for external financial statement users.

Beginning work in process (WIP) inventory

+ Direct materials used (DM used)

+ Direct labor (DL)

+ Manufacturing overhead (MOH)

= Total manufacturing costs (TMC)

- Ending work in process(WIP) inventory

= Cost of goods manufactured (COGM)

Beginning finished goods (FG) inventory

+ Cost of goods manufactured

= Cost of goods available for sale

- Ending finished goods inventory

= Cost of goods sold

2. Tom is the manager of a startup company, Simply Healthy, which produces fresh high protein high fiber food for customers. At the end of the year, in order to raise more capital, Tom wanted to use the initial data to get summarized information as required by potential new shareholders. Would you please help Tom to prepare the summarized information as required in the following

questions? (Suppose that property plant tax is prepaid, salaries, utility bill and shipping cost are on account)

Revenue $2,280,000Beginning of year work in progress inventory $35,000Beginning finished goods inventory $55,000 Direct materials used for Product 1 in the year $50,000Direct materials used for Product 2 in the year $16,000Direct materials used for Product 3 in the year $12,300Direct labor used for Product 1 in the year $30,000Direct labor used for Product 2 in the year $11,000Direct labor used for Product 3 in the year $10,000Sales commissions $7,500Factory supervisor’s salary $60,000Ending work in process inventory $ 18,000Ending finished goods inventory $12,000Insurance on plant $ 2,000Total estimated manufacturing overhead for the year $ 90,000Total estimated direct labor cost for the year $ 50,000Cost for delivering the prepared meals to customers $ 10,000Plant property tax $ 10,000Plant utility $ 21,000R&D expense $ 11,000Cost for marketing $ 12,000Cost for shipping the raw materials (e.g., nuts, wholegrain buns) to the factory

$ 8,000

1. Calculate the actual MOH for the year ended December 31.

Solution: This question wants to check your understanding on manufacturing overhead (MOH). Manufacturing overhead is the indirect cost incurred during the production process (within the factory) for manufacturing companies. Note that indirect cost is the cost that cannot be conveniently (or easily) traced to the cost object. MOH

Factory supervisor’s salary $60,000 Insurance on plant $2,000 Plant property tax $10,000 Plant utility $21,000 Cost for shipping the raw materials (e.g., nuts, wholegrain buns) to the factory

$8,000

Total MOH $101,000 Note that “cost of shipping the raw materials” in the above can be classified as direct material cost if the material above is direct material. As I did not make it clear that the material is direct material, so I classify it as MOH in this question. Note that, in general, freight-in cost for a merchandiser is direct material cost.

2. Suppose Tom plans to use direct labor cost to allocate MOH, would you please calculate the MOH for Product 1, Product 2, and Product 3?

Solution:This question wants to refresh your memory of the MOH allocation. This question informs that direct labor cost is the cost driver used to allocation MOH, so we allocate the MOH based on direct labor cost. Note that predetermined overhead rate is estimated by ESTIMATED numbers rather than actual numbers. We need to use total estimated manufacturing overhead costs and total estimated amount of allocation base to determine POHR.

POHR=Total estimated mfg overhead costsTotal estimated amount of allocation base=90,000/50,000=1.8 dollar MOH per dollar of direct labor

Product 1: Allocated MOH= POHR * Actual amount of allocation base used by the job

=1.8 dollar MOH per dollar of direct labor * 30,000 dollars of direct labor=54,000 dollars MOH

Product 2:

Allocated MOH= 1.8* 11,000=$19,800

Product 3:

Allocated MOH= 1.8*10,000=$18,000

3. Compare the difference between actual MOH and the allocated MOH.

Solution:Total amount of allocated MOH = 54,000 + 19,800 + 18,000= $91,800Actual MOH= $101,000Therefore, MOH is undercosted by $9,200.

4. Prepare journal entries for the use of direct raw material, direct labor, and actual MOH. (Suppose that salaries are made on account.)

Solution: This question wants to check journal entry preparation for manufacturing costs. Note that under a job order costing system, managers prepare a separate ledger for each job for internal use. To prepare for external financial reporting for this question, you only need to prepare one combined journal entry for use of DM, DL, and MOH for the three products.

1. Use of direct raw materials

Dr. Work in Process Inventory 78,300 Cr. Raw Materials 78,300 (note: 50,000+16,000+ 12,300=78,300)

2. Use of direct Labor

Dr. Work in Process Inventory 51,000

Cr. Salaries and wages payable 51,000 (note: 30,000+11,000+10,000=51,000)

3. Use of actual MOH

Dr. MOH 101,000

Cr. Salaries and Wages Payable (Supervisor’s) 60,000Cr. Prepaid Insurance 2,000Cr. Property Tax Payable 10,000Cr. Accounts Payable (Utility bills) 21,000Cr. Accounts Payable (Material shipping bills) 8,000

5. Prepare journal entries for the allocation of MOH into the work in progress account.

Solution: Dr. Work in Process Inventory 91,800

Cr. MOH 91,800

6. Prepare a schedule of cost of goods manufactured for Simply Healthy for the year ended December 31. Note that TOM only uses allocated MOH to calculate the asset value of work in progress inventory, but does not adjust work in progress inventory based on the difference between actual MOH and allocated MOH.

Solution:This still checks your understanding on the calculation of “cost of goods manufactured”.

Beginning work in process (WIP) inventory $35,000

+ Direct materials used (DM used) $78,300

+ Direct labor (DL) $51,000

+ Manufacturing overhead (MOH) $91,800

= Total manufacturing costs (TMC) =$256,100

- Ending work in process(WIP) inventory - $ 18,000

= Cost of goods manufactured (COGM) = $238,100

7. Prepare a schedule of cost of goods sold for Simply Healthy for the year ended December 31. Note that to get the accurate value of net operating income, investors require Tom adjust the difference between actual MOH and allocated MOH.

Solution:

Beginning finished goods (FG) inventory $55,000

+ Cost of goods manufactured $238,100

= Cost of goods available for sale = 293,100

- Ending finished goods inventory - $12,000

= Cost of goods sold = 281,100

As MOH is undercosted by 9,200 as indicated in Q3 of this question, we need to do the adjustement

Adjustment for COGS 281,100 + (101,000-91,800) = 290,300

8. Prepare the income statement for Simply Healthy.

Solution:(Note that the revenue should be 2,280,000. The number in the original ppt slides 1,280,00 is a typo).

This question refreshes your memory on income statement. Note that cost information is a very important component in income statement. As this case does not provide more detailed information such as interest expense and revenue tax, the income statement provided can only be a simple version.

Simply Healthy

Income Statement

For Year Ending Dec. 31, 2014

Revenue:

$2,280,000

Cost of Goods Sold:

$290,300

Expenses

Selling expenses 1 (Sales commissions) $ 7,500

Selling expenses 2 (Delivering costs) $10,000

Selling expenses 3 (Marketing costs) $12,000

R&D expenses $11,000

Net Operating Income

=$1,949,200